Interactive Investor

Top picks in UK tech sector named

American technology giants grab the headlines, but the UK has some high-quality technology companies exposed to artificial intelligence. One City expert reveals their favourites.

4th June 2024 13:45

by Graeme Evans from interactive investor

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Investors wanting UK exposure to the fast-growing technology sector were today urged to consider smaller cap opportunities such as GB Group (LSE:GBG), Cerillion (LSE:CER) and Tracsis (LSE:TRCS).

The UK listed technology sector accounts for just 1% of the FTSE 350 compared to 30% of the S&P 500, where the likes of NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) have again surged in value this year.

Alongside this US dominance, a steady stream of London-listed companies have been acquired by private equity and not been replaced by IPOs. Most recently, Thoma Bravo made a recommended offer for UK cybersecurity software firm Darktrace (LSE:DARK).

However, analysts at Liberum point out that the picture is brighter lower down the market cap spectrum, with technology accounting for 11% of the AIM 100 index.

The companies in its selection of UK software and IT services don’t come cheap but offer two times market average growth, strong balance sheets and positive earnings momentum.

The top picks include the telecom software company Cerillion for long-term growth/momentum, cybersecurity firm NCC Group (LSE:NCC and the digital location and identity business GB Group for recovery potential, and Tracsis for a re-rating as it shifts to higher-margin software products.

Liberum adds that it sees value-added resellers as one of the best ways for investors to get exposure to artificial intelligence.

This category includes Bytes Technology Group Ordinary Shares (LSE:BYIT), whose involvement with Microsoft dates back to 1996 and has evolved to become one of the tech giant’s largest partnerships in this country.

The FTSE 250-listed shares have been hit by governance issues but are up 13% in the past month and backed by Liberum to reach 660p from today’s 563p. It said in today’s note: “Bytes has a very strong track record and continues to gain market share of UK IT channel spend.

“The group is well-placed to grow at a low teens rate over the next few years, returning surplus capital via special dividends.”

On the AIM-traded Cerillion, Liberum says consistent double-digit revenue growth and an earnings margin in the range of 40-45% places it at the top of the UK listed software peer group.

A pipeline near record highs and contract wins from new and existing customers means Liberum reckons the shares are worth re-visiting, having increased its price target to 1,700p.

In terms of turnaround stories, GB Group has been rehabilitating itself after the dilutive acquisition of Acuant in 2021 and two years of subsequent downgrades as the pandemic tide went out.

Its year-end update was slightly better than expected, with identity improving and guidance supportive of Liberum’s view that organic growth should accelerate to about 5% in 2025.

Cash flow is strong and the broker, which has a target price of 415p, said a recent move by Entrust to buy UK fintech Onfido signalled a return to corporate activity in a sector where GB “still looks vulnerable to an approach”.

NCC, the cybersecurity firm, has been backed with a target price of 170p as new management executes a plan to improve performance and reduce complexity. Liberum believes the combination of cost actions, offshoring and improving consultant utilisation should drive higher margins, boosting hopes that shares can  re-rate as profitability improves.

Tracsis is a technology and services business, which is a play upon the digitisation of the UK and North American rail sector.

The AIM-listed shares have advanced in recent weeks to 932p but Liberum has a target of 1,400p, based on hopes that improved margin and cash conversion can drive a re-rating.

The broker adds: “There is some near-term estimate risk, subject to the timing of when US contracts land, but we view this transitional period as a buying opportunity.”

AIM stocks tend to be volatile high-risk/high-reward investments and are intended for people with an appropriate degree of equity trading knowledge and experience. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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